Jointly Owned Homes in Bankruptcy: What Happens?

housedividedA house divided against itself cannot stand.  

— Abraham Lincoln (assassinated 150 years ago yesterday)

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

My sister and I are joint owners of a home left to us by our parents. I live in the home and pay for the taxes and upkeep. There is no mortgage. My sister recently filed for Chapter 7 bankruptcy.  She and I are barely on speaking terms. 

Here’s the problem. I got a letter from the bankruptcy trustee telling me that if I want to keep the home, I have to buy my sister’s share of the home. If I don’t, the trustee will sell the house. The home is worth $200,000, and I don’t have $100,000 to fork over to the trustee. 

Can the trustee do this?  

Yours truly, 

Jim

Dear Jim,

Most likely the bankruptcy trustee will be able to sell your home if you can’t come up with the money. But once the home is sold, the trustee will turn over half of the proceeds to you.

(I am assuming that your parents did not create a legally binding directive permitting you to remain on the property. If they did, you should immediately get a lawyer to respond to the trustee.)

What Happens to Property in Bankruptcy

Your sister’s Chapter 7 bankruptcy filing automatically created a bankruptcy estate composed of all her assets. A bankruptcy trustee was appointed to administer the assets in her case. Like everyone filing for bankruptcy, she can keep certain property if it is “exempt.” However, homes in which you don’t live are usually not exempt. (Learn more about how Chapter 7 bankruptcy works and why the trustee sells property.)

If an item of property is not exempt, the trustee can sell it and use the proceeds to repay creditors. Even though your sister owns only half of the property, the equity in her half is a nice chunk of money that could go to her creditors.

When Can a Trustee Sell Co-Owned Property?

A trustee can sell a piece of property even if the debtor (your sister) doesn’t own the whole thing. But in order to do so, the trustee must meet the following criteria:

  • It’s not practical to divide up the property. A large tract of land might be subdivided to sell just the debtor’s share, but a single house and lot can’t be sawed in half to do that.
  • Selling the debtor’s undivided interest would bring in less money than selling the entire parcel. In your situation, it is unlikely that anyone else would buy your sister’s half of the property for what it is really worth, because the buyer would still have to deal with you.
  • The benefit to the bankruptcy estate from a sale of the entire property outweighs the detriment that will be faced by the other owners.
  • The property is not used for the production of energy.

In your situation, it’s extremely likely that the trustee will be able to sell the home. But keep in mind, once the trustee does so, he or she will have to give you half of the proceeds from the sale. So, if the sale nets $200,000, you will get $100,000 and the bankruptcy estate will get the other $100,000 (which will then be used to pay your sister’s creditors).

Coming Up With Money for the Home

If you have decent credit and you can afford to make payments on a $100,000 mortgage, consider getting a home loan and using the money to buy your sister’s share from the bankruptcy estate. In that way, you’ll become a 100% owner of the home.

–Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer. 

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